Dec 25, 2008New York Times Op-Ed Columnist
Nicholas D. Kristof

The Sin in Doing Good Deeds
By NICHOLAS D. KRISTOF

Here’s a question for the holiday season: If a businessman rakes in a hefty profit while doing good works, is that charity or greed? Do we applaud or hiss?
A new book, “Uncharitable,” seethes with indignation at public expectations that charities be prudent, nonprofit and saintly. The author, Dan Pallotta, argues that those expectations make them less effective, and he has a point.

Mr. Pallotta’s frustration is intertwined with his own history as the inventor of fund-raisers like AIDSRides and Breast Cancer 3-Days — events that, he says, netted $305 million over nine years for unrestricted use by charities. In the aid world, that’s a breathtaking sum.

But Mr. Pallotta’s company wasn’t a charity, but rather a for-profit company that created charitable events. Critics railed at his $394,500 salary — low for a corporate chief executive, but stratospheric in the aid world — and at the millions of dollars spent on advertising and marketing and other expenses.

“Shame on Pallotta,” declared one critic at the time, accusing him of “greed and unabashed profiteering.” In the aftermath of a wave of criticism, his company collapsed.

One breast cancer charity that parted ways with Mr. Pallotta began producing its own fund-raising walks, but the net sum raised by those walks for breast cancer research plummeted from $71 million to $11 million, he says.

Mr. Pallotta argues powerfully that the aid world is stunted because groups are discouraged from using such standard business tools as advertising, risk-taking, competitive salaries and profits to lure capital.

“We allow people to make huge profits doing any number of things that will hurt the poor, but we want to crucify anyone who wants to make money helping them,” Mr. Pallotta says. “Want to make a million selling violent video games to kids? Go for it. Want to make a million helping cure kids of cancer? You’re labeled a parasite.”

I confess to ambivalence. I deeply admire the other kind of aid workers, those whose passion for their work is evident by the fact that they’ve gone broke doing it. I’m filled with awe when I go to a place like Darfur and see unpaid or underpaid aid workers in groups like Doctors Without Borders, risking their lives to patch up the victims of genocide.

I also worry that if aid groups paid executives as lavishly as Citigroup, they would be managed as badly as Citigroup.

Yet there’s a broad recognition in much of the aid community that a major rethink is necessary, that groups would be more effective if they borrowed more tools from the business world, and that there is too much “gotcha” scrutiny on overhead rather than on what they actually accomplish. It’s notable that leaders of Oxfam and Save the Children have publicly endorsed the book, and it’s certainly becoming more socially acceptable to note that businesses can also play a powerful role in fighting poverty.

“Howard Schultz has done more for coffee-growing regions of Africa than anybody I can think of,” Michael Fairbanks, a development expert, said of the chief executive of Starbucks. By helping countries improve their coffee-growing practices and brand their coffees, Starbucks has probably helped impoverished African coffee farmers more than any aid group has.

Mr. Fairbanks himself demonstrates that a businessman can do good even as he does well. Rwanda’s president, Paul Kagame, hired Mr. Fairbanks’s consulting company and paid it millions of dollars between 2000 and 2007.

In turn, Mr. Fairbanks helped Rwanda market its coffee, tea and gorillas. Rwandan coffee now retails for up to $55 a pound in Manhattan, wages in the Rwandan coffee sector have soared up to eight-fold, and zillionaires stumble through the Rwandan jungle to admire the wildlife. President Kagame thanked Mr. Fairbanks by granting him Rwandan citizenship.

There are lots of saintly aid workers in Rwanda, including the heroic Dr. Paul Farmer of Partners in Health, and they do extraordinary work. But sometimes, so do the suits. Isaac Durojaiye, a Nigerian businessman, is an example of the way the line is beginning to blur between businesses and charities. He runs a for-profit franchise business that provides fee-for-use public toilets in Nigeria. When he started, there was one public toilet in Nigeria for every 200,000 people, but by charging, he has been able to provide basic sanitation to far more people than any aid group.

In the war on poverty, there is room for all kinds of organizations. Mr. Pallotta may be right that by frowning on aid groups that pay high salaries, advertise extensively and even turn a profit, we end up hurting the world’s neediest.

“People continue to die as a result,” he says bluntly. “This we call morality.”

A version of this article appeared in print on December 25, 2008, on page A33 of the New York edition.

The Double Standard

By RENÉE IRVIN

Dan Pallotta has written Uncharitable as a response to every media report about a charity spending $400,000 to raise $1 million, every donor who wants at least 90 percent of her donation to go toward the cause, and every nonprofit executive director who eschews marketing for fear that donors will consider it extravagant. “Enough already!” the book explodes. And it does so with such good reason and blunt candor that it deserves to become the nonprofit sector’s new manifesto.

Pallotta reviews the frugal, almost prudish constraints the public expects from nonprofits, everything from a ban on paid advertising to substandard wages for nonprofit employees. But if we want the nonprofit sector to do without the successful tactics of the business sector—say, marketing—how can we expect the nonprofi t sector to aspire to greatness? How will it ever grow, get results, and reach new supporters? Why, for instance, did the American Cancer Society spend only $1 million on anti-tobacco legislation in 1998, when, during that same year, the five largest cigarette manufacturers spent more than 6,000 times that amount in advertising and promotions?

Not only must nonprofits be allowed to use the tools of commerce to thrive and accomplish their missions, Pallotta argues, but the public also needs to get over its mistaken and tenacious fixation on fundraising costs and overhead ratios. He goes on to show how misleading, easily manipulated, and plainly irrelevant these ratios are, and suggests we instead ask 16 questions that would reveal “What has the organization achieved, and what can it achieve with my donation?” Everyone who cares about nonprofit organizations and their potential accomplishments—from journalists to sophisticated donors to foundation officials—should read this section of the book. They’ll surely be convinced that fundraising ratios and program expense ratios are a silly, useless, and even fraudulent way to compare “efficiency” across nonprofit organizations.

Every nonprofit professional, meanwhile, should read Pallotta’s section on how nonprofits can use the power of advertising. If donors and staff members complain that “a dollar spent on advertising could have been spent caring for the needy,” he advises the nonprofit manager to explain that exposing new supporters to the cause could result in a tenfold increase in donations. Indeed, as John Kenneth Galbraith noted in The Affluent Society: “The engines of mass communication, in their highest state of development, assail the eyes and ears of the community on behalf of more beverages but not of more schools. Even in the conventional wisdom it will scarcely be contended that this leads to an equal choice between the two.”

Pallotta goes on to speculate why the public expects nonprofits to behave so differently from for-profits and points the finger at Americans’ Puritan heritage of self denial and frugality. Perhaps the Puritans do have a moralistic hold on us with regard to nonprofit sector endeavors, but given the apparent absence of Puritan influence elsewhere in 21st-century America, I’m doubtful of this hypothesis. We economists would instead blame nonprofit sector managers who reassure donors that their money is well stewarded by signaling their steadfast frugality. And sociologists would say that employees self-sort into a nonprofit avocation—that is, people uncomfortable with business-sector strategies and culture gravitate toward the nonprofit sector.

But whatever the underlying cause of the public’s belief that administrative costs are wasteful and overhead is bad, Pallotta believes we must speak up on behalf of nonprofits and educate donors on the necessity of not just administrative expenses, but all of the business strategies that can build the best launching pads for nonprofit endeavors.

Pallotta ends the book with a case study of Pallotta TeamWorks, the author’s own for-profit firm that was wildly successful in raising funds on behalf of nonprofit clients. In nine years of producing three-day walking and one-week cycling events, the company netted $305 million for several health-related charities. But despite the massive new infusion of donations generated for these charities, Pallotta reports that the press focused on the costs the events incurred, including those of professional marketing and branding—its message was, Couldn’t that money have gone toward the cause instead? When negative media coverage didn’t stop, the nonprofits disassociated themselves from Pallotta TeamWorks and the firm shut its doors in 2001. The nonprofits eventually redeemed themselves in the eyes of the public, but without the revenue generated by the lucrative walking and cycling events, they were forced to lay off staff members and cut programs.

This case study is fascinating, and it will surely invite armchair quarterbacks to reckon how they might have handled both the media and the nonprofit organizations. The study also tempts us to write off the book as motivated by Pallotta’s bitter experience of being pilloried by the moralistic media for having managed his business like a business.

But that would be hasty. Uncharitable gives us much more than a tale of sour grapes. Pallotta has written thoughtfully and forcefully on why and how we limit the effectiveness of the nonprofit sector, and he asks us point-blank to change our thinking. For the sake of the nonprofit sector, I hope he succeeds.

Renée Irvin is an associate professor of planning, public policy, and management at the University of Oregon. She also directs the university’s graduate certificate in nonprofit management program. Her research focuses on the economics of nonprofit and philanthropic organizations.

Profits and Charity: How to Be Bold

Between 1994 and 2002, more than $300m was raised in America for dozens of AIDS and breast-cancer charities at bike rides and walks organised by a profit-making fund-raising outfit called Pallotta TeamWorks. Then, in August 2002, after many of the charities decided to bite the hand that fed them, the Los Angeles-based organisation was forced to close, sacking its 350 employees. The final straw had been the decision by Avon Products Foundation to launch its own version of a three-day breast-cancer walk developed by Pallotta, which it fired.

The charities had become angry after a number of newspapers complained that the firm was too costly, charging expenses that typically exceeded the 35 cents per dollar raised recommended by various charitable watchdogs. They also complained that Pallotta was a for-profit company, and that its founder, Dan Pallotta, paid himself a salary well above the norm.

As Mr Pallotta points out in his riposte, “Uncharitable”, firing his firm may have got the expense ratio down, but it did the charities no good. After Avon started its own three-day walks, the most it managed to raise was $22.7m after expenses; the last walk organised by Pallotta TeamWorks, after costs, had provided Avon with $70.9m to make grants. The other charities that dispensed with Mr Pallotta’s services suffered similar falls and some had to lay off staff.

Mr Pallotta’s anger at his treatment has prompted a big idea: the charitable sector should embrace capitalism, and not just by borrowing business methods from the corporate world, but by actively seeking to make a profit by doing good. Why is most charity hopelessly ineffective, he asks? Because it is run according to an ideology that ensures it will fail: charities are starved of the money, techniques and talents they need to succeed—things that are taken for granted in the business world.

Mr Pallotta blames the Puritans who founded America, especially John Winthrop, who set out in his famous “city on a hill” sermon that the “Modell of Christian Charity” requires the poor to be given handouts rather than helped to escape from their poverty. “Charity”, argues Mr Pallotta, “is no longer an exchange between the non-needy and the needy. It is an exchange between the non-needy (donors) and the non-needy (the charity work force) to provide services to the needy. It is an exchange between equals to help the needy.” Why is society happy that carmakers make a profit, pay competitive salaries and advertise their goods, yet it is outraged when charities do the same?

Mr Pallotta produces quite a lot of both data and logic. If you do not first analyse a fund-raiser’s results, how is it possible to judge whether what it spent was justified? He also makes a convincing case for charities to spend far more on advertising, perhaps even selling shares to pay for it. If this makes you queasy, read Mr Pallotta’s book. As he says, “To mount a campaign to convert 6 billion people to love—which is essentially the role of charity—takes a lot of money…Raise the capital to promote the idea by offering a return on investment, hire the best people to manage the effort, and run the advertising to spread the word. You beat capitalism at its own game.”

Uncharitable

By PAUL BREST

Last week I wrote that nonprofits should aim to optimize costs, not minimize them. Administrative costs are not only justified but mandated if they contribute to an organization's social impact. Therefore, forcing charities to keep administrative costs excessively low may prevent them from achieving their missions.

Dan Pallotta, author of the controversial new book Uncharitable: How Restraints on Nonprofits Undermine Their Potential, adopts this position to challenge some sacred cows of the nonprofit sector. Pallotta argues that our preconceptions about how charities should behave--for instance, that they should pay low salaries and not buy advertising--actually hinder their social missions. In short, Pallotta doesn't think charities should have to play by different economic rules than businesses.

For example, Pallotta wants to free charities to use paid advertising to "compete with consumer products for the customer's dollar." Paying $50,000 for a newspaper ad is justified if it brings in $500,000 in new donations. Pallotta argues that allowing charities to use paid advertising can turn dollars that would be spent on for-profit goods and services towards charity.

Charities also need to be able to invest those dollars in long-term strategies. All great businesses invest in building infrastructure and developing staff skills. They spend enormous sums to find and train great leaders. But some donors expect charities to spend their dollars immediately to serve the needy, not build their organization's capacity to have future impact.

According to Pallotta, the expectation that donated dollars should immediately serve the needy prevents nonprofits from building the capacity necessary to make fundamental change. If they're forced to use all their resources to remedy problems in the short term, nonprofits can't invest in actually solving them. In fact, the Hewlett Foundation acts on this idea by awarding Organizational Effectiveness grants for nonprofits to hire consultants, work on strategy, and improve communications and evaluation systems. We believe that these long-term investments can produce transformational results.

Pallotta also thinks that low salaries in the social sector reduce the supply of top talent. He believes that compensating people who work in charity "according to the value they produce" will help attract better leaders to the sector.

It's an error to think that because a charity serves the poor, its staff should be kept poor as well. When they identified and investigated twelve of the most successful nonprofits, for example, Heather McLeod Grant and Leslie Crutchfield found that high-impact nonprofits tend to compensate their executives well, investing in human resources to increase their impact.

Donors often monitor a charity's practices rather than its impact because measuring social impact is hard, and it's much easier to give a nonprofit a rating based on available financial data such as administrative costs. But rather than acquiesce in this state of affairs, we should demand information about results. There's a growing movement to create a nonprofit information marketplace to do this.

In the meanwhile, if some donors are turned off by nonprofits' paying decent salaries, the rest of us should try to educate them. If Pallotta's book helps change some people's minds about this, it will have done a real public service.

The Business of Charity:
IN Los Angeles columnist Dana Miller talks to Dan Pallotta about his new book, Uncharitable.

By DANA MILLER

Full disclosure: I have known Dan Pallotta for 15 years. Dan is one of the good ones. Unlike idiots who claim to have “created” the AIDS Walk (fundraising via walks was a creation by the March of Dimes in 1938), Dan is truly the inventor of the AIDS Rides and the Breast Cancer 3-Days. He has written an important book that takes on the premise of the way we view charitable giving today. It is titled, Uncharitable.

His take is simple and salient. It’s high time we ramp up our charity world and get it out of the “Mickey and Judy, let’s put on a show” phase to one that deals with reality and employs strong business tools like advertising, risk-taking, competitive salaries and profits to capture capital. From when I was first involved in events until now, I have seen a sea change. Vendors always used to donate everything. Venues were most often free. Not so much today. Charity is big business. That is, for everyone but the people who deliver on the promise.

“We allow people to make huge profits doing any number of things that will hurt the poor, but we want to crucify anyone who wants to make money helping them,” Dan says. “Want to make a million selling violent video games to kids? Go for it. Want to make a million helping cure kids of cancer? You’re labeled a parasite.”

Dan closed Pallotta TeamWorks in 2002. His campus in the Valley had more than 200 employees, and his events netted more than $305 million over nine years for charity. That’s almost $34 million net a year. His top salary was $394,500. Compare that to AIDS Project Los Angeles’ CEO who, according to Charity Navigator, is paid $221,250 off a gross of $15 million a year. Amazing. I asked Dan why he closed Pallotta TeamWorks.

“I didn't close PTW by choice. We were negotiating a contract for a new partner for the Breast Cancer 3-Day program in August 2002—the lion’s share of our business—when the Avon Products Foundation announced it was staging its own 2-day walks for breast cancer. The new partner backed out, and there was not enough time to find the capital required to keep the business in operation without the 3-Days,” he explains. “We subsequently sued Avon for breach of contract. In July 2005, three years after the suit was filed, an independent arbitrator ruled in Pallotta TeamWorks’ favor on the breach of contract claim.”

Without Dan and his team, the breast cancer events went from raising $71 million annually to $11 million. This was just simply myopic. In Dan’s book, he points out we have been trained to ask the wrong question, “What percentage of my donation goes to the charity?” What about the quality of the service?

Dan writes: “It is time to give charity the big-league freedoms we really give to business—the freedom to get the best people and pay them whatever it costs for the value they can produce, freedom to buy ads on the Superbowl—yes, at a cost of $2.6 million a pop—to start building market demand, freedom to take big risks, and to fail big if that’s what it takes to learn, and the freedom to start attracting capital in a stock market by paying investors a financial return. It’s time to stop obsessing about overhead and start focusing on progress. Change charity, and charity can change the world. Find a cure for cancer? Yes it can. End homelessness in our cities? Yes it can. Eradicate AIDS and malaria? Yes it can. And what about us who have held it back? Can we change our thinking? Can we give charity the permission to let loose its full potential? Yes, we can.”

This tome is big-time out-of-the-box thinking that will cause ripples. Yet if you care about charity, it is a must read. While I don’t want to lose the volunteer passion and compassion in charitable work, it’s high time we confront the fact that, for the most part, this is no longer a bake sale. I asked Dan to look to the future.

“I have not let go of any of my dreams of a better world,” he said. “I am working as hard as I ever have to create change in the world, and who knows, one day I may still run for office. David Mixner said something powerful to me once: ‘Someone’s going to be the first gay president of the United States. It might as well be you.’ Who knows. I want to do whatever work the good Lord seems most to want me to do. I want to make a difference and provide a good life for Jimmy and our three kids. For too long, those two things—that is, doing well and doing good—have been mutually exclusive choices in the world. Right now I’m on a crusade to change that, because I don’t believe there is any ethic more counterproductive, or that scares more talented people away from social change work, than that one. People have to be allowed to pursue their dreams of a better world and their dreams of a better life for themselves and their families at the same time. Those two things cannot be seen as being at odds with one another any longer.”

Uncharitable, Dan PallottaBy FRANK PETERS

Just read this: if you sit on a nonprofit board don't think you're going anywhere soon, not until after you listen to Dan Pallotta describe Uncharitable, his riveting indictment of how we hobble nonprofits. It's a myth-busting, paradigm-shifting re-examination of what's going on in Charity, in my case, right under my nose.

I'd noticed the review in the New York Times awhile ago, so I picked up a copy then it sat in a pile. But since I sit on 4 nonprofit boards, the sub-title nagged: "How Restraints on Nonprofits Undermine Their Potential"; I took it on 2 long distance trips, a week each in Atlanta then Madrid. What a great companion this manifesto turned out to be.

Like many of my angel investor peers, in addition to sitting on for-profit boards of private companies, many of us end up on nonprofits, too. For myself, I'd learned quite a bit from fellow angels, especially Tech Coast Angels' Dave Berkus, and I'd enjoyed putting some new concepts on the table and into play for 2 nonprofit boards in the past year. I was enjoying the process: making an organizational change and seeing a pretty immediate positive result, then I did it again for the local school of the arts advisory board I sit on and again, an almost immediate positive change; this was fun, tweeking nonprofit boards was not only possible, but the feedback cycle could be immediate. Like learning to drive, I thought, maybe I can accelerate the cycle. So that makes me and maybe you, too, the perfect audience for Uncharitable author, Dan Pallotta. I need to create a new sub-category on this blog, "myth buster", then Dan could be cross referenced with the likes of Fools Gold author Scott Shane and Early Exits author Basil Peters..

On the 10 hour flight home from Madrid last month I lent my copy to Angel Capital Association Chairman, John Huston. Half way over the Atlantic he hands it back, "this makes my head hurt; I'm getting my own copy!". When I tell Dan, like the interviewer I'm supposed to be, he asks, "what do you think he meant by that?". I was pretty sure I knew and you'll be able to guess once you listen to Dan Pallotta.

April 8, 2009
Reason.com

Dan Pallotta: How to Make Charity Pay—Why nonprofits should be allowed to harness the power of capitalism

Why should charities be denied access to the fruits of the capitalist system?

Why should charities be denied access to the fruits of the capitalist system?

Once upon a time, in a land called America, there was a fundraising agency called Pallotta Teamworks. This agency and its 350 staff organised hugely successful fundraising events on behalf of lots of different charities, raising half a billion dollars over nine years. Then one day the media got wise to the fact that Pallotta Teamworks was also a very profitable business and that its founder, Dan Pallotta, was making a very good living off the back of these charity events that he ran. Outrage followed, the agency’s charity clients all cut their ties to it, and eventually the business went bust and everyone lost their jobs. The charities that had benefited from the events started organising them in-house instead, but didn’t raise anywhere near the amounts that Pallotta Teamworks had done for them.

Not surprisingly, this chain of events had a profound impact on Dan Pallotta. He got very angry at what he believed was an entirely illogical public response to his agency’s success. If he was providing what his clients wanted, ie lots of unrestricted moolah for them to spend doing their excellent work reducing poverty and researching a cure for cancer and housing people etc, why should it matter how much profit he made out of it? Surely the end justified the means?

Except, of course, it doesn’t – not where charity is concerned. Our fundamental canons about the world of charitable endeavour ensures that it must never stray anywhere near the boundaries of personal profit – indeed, the very thought of anybody using charitable donations for anything other than the cause for which it was intended evokes horror. Charity should be done altruistically, with no hint of self-interest. Pallotta wondered why this should be. Why do we applaud the endeavours of someone who earns huge profits from making and selling widgets – even those widgets that have an arguably damaging effect on society, such as violent video games or cheap alcoholic drinks - yet prevent anyone using the same methods to fight hunger or disease or discrimination?

In his book, Uncharitable, Pallotta traces the reason back to the early American settlers. The Puritans who travelled to New England from the mother country in the 1600s glorified profit-making in commerce, but only as a means to progress the community, not as a product of self-interest. Indeed, pursuit of wealth could only be considered moral if it was devoid of self-interest, and pursued as a way of helping the poor. Thus it was that the business of charity was denied the tools that made commerce so successful. As Pallotta puts it: “How could you possibly make money helping the poor if helping the poor was your penance for making money?”

This ethos has endured over time, and remains intact today. It has created, according to Pallotta, an “economic aparthied” that denies the nonprofit sector the methods and permissions that the private sector can use without limit. He examines these in some detail: For-profit companies can pay their staff top salaries and huge bonuses, and so end up attracting the brightest talent. Non-profit pay is scrutinised by the media and orgnaisations are vilified if they are thought to be earning too much. For-profit companies can spend huge amounts on advertising, and so end up reaching more customers and getting more money back. Non-profits are expected to spend almost all their money on the cause, and invest inordinate amounts of time and effort paring their overheads and demonstrating how efficient they are. For-profit companies can float shares on stock markets, and so raise large amounts of capital to invest in their work. Non-profits rely mainly on public donations, grants and occasionally loans, and the difficulty in finding sustainable funding has become part of their DNA. For-profit companies can take a long-view view, and risks, to pursue their vision. Non-profits are encouraged to spend as much as possible as quickly as possible, because it is immoral to sit on money while problems persist. But they musn’t spend on anything risky, just in case the money is ‘wasted’. They must not dare to dream.

Taking all this into account, is it any wonder that charities haven’t yet cured HIV, or eradicated hunger, or stopped global warming? Pallotta argues that the very foundation of charity – effectively denial of self-interest - is what undermines its potential.

Of course, there has been some tinkering at the edges - venture philanthropy, social enterprise and micro-finance have all been cited as blurring the boundaries between capitalism and charity. But Pallotta unpicks these models and demonstrates that while they may be pioneering approaches to using capitalism to solve social problems, or innovative programme approaches within charities, they do not address the critical issue of charities being hamstrung by the ideological and economic contraints he outlines.

He puts it in the starkest possible terms when he says: “Do we really think it is comforting to the mother of a child who has just died of bird flu to be told that at least no one earned a profit in the failed effort to save her son?”

Pallotta’s view is not easy to digest – if nothing else, he is absolutely correct that the way we think about charity is very ingrained, and the prospect of it being reconstituted as a for-profit model is so radical that it takes some getting used to. But once you’ve got your head around it, it becomes so obvious you can’t believe nobody’s thought of it before.

Uncharitable

Uncharitable by Dan Pallotta: Why are we denying charity the power tools of capitalism?

Posted by: Nina @ 5:26 AM

“What percentage of my donation goes to the cause?” Isn’t that what we’re all trained to ask when a charitable organization comes calling for money?
Dan Pallotta’s new book, Uncharitable argues that this paradigm needs a shift and he’s speaking out about how a for-profit entrepreneurial approach should finally be embraced by the nonprofit sector.

This isn’t the first time Pallotta’s name has been attached to controversial ideas in the nonprofit world. Most gays and lesbians will recognize his name (or that of his Pallotta TeamWorks) as the organization behind the very first California AIDSRide… you know the one… that grueling week-long bike ride from San Francisco to Los Angeles. It was a first in fundraising when he created this multi-day charitable event that required participants to raise mandatory minimums of two thousand dollars.

Pallotta changed the game for citizen activism. But as the years wore on he was criticized for his business model, his salary and the way Pallotta TeamWorks went to market with its events. I remember reading about the controversy back in 2002 and wondering what all the fuss was about. Why was he being chastised for infusing nonprofit process with winning strategies from the playbook of capitalism? Apparently, begging for donations is supposed to come with a higher calling albeit lower price than peddling a product or service in the for-profit sector. Isn’t that a double standard?

We let people make a fortune doing any number of things that will harm the poor, but want to crucify anyone who wants to make money helping them. This sends the top talent coming out of the nation’s best business schools directly into the for-profit sector and gives our youth mutually exclusive choices between making a difference and making money. This we call altruism.

We let Apple and Coca-Cola plaster our billboards and television sets with advertising, but we don’t want important causes “wasting” money on paid advertising. So the voices of our great causes are muted and consumer products get lopsided access to our attention, twenty-four hours a day. This we call frugality.

Amazon could forego investor returns for six years to build market dominance. But if a charity embarks on a long-term plan with no return for the needy for six years we expect a crucifixion. This we call caring.

We aren’t upset when Paramount makes a $200 million movie that flops, but if a $5 million charity walk doesn’t make a 75% profit in year one we want the attorney general to investigate. So charities are petrified of exploring new revenue-generating methods and can’t develop the powerful learning curves the for-profit sector can. This we call prudence.

We let for-profit companies raise massive capital in the stock market by offering investment returns, but we forbid the payment of a financial return (“profit”) in charity. The result? The for-profit sector monopolizes the capital markets while charities are left to beg for donations. This we call philanthropy.

You get the gist. Something is fundamentally wrong with the fundraising model and Pallotta is on a quest to change that: “Uncharitable is a manifesto that puts a new cause on the map - equal economic rights for charity.”

Lots of cool people are recommending this book including Sam Page and David Mixner. And of course, in my book, you are cool if Kai Ryssdal invites you onto Marketplace. So if you’re looking for something both altruistic and capitalistic to read this holiday season; buy the book and then make a few year-end donations to your favorite charities without first considering, “What percentage of my donation goes to the cause?”

Change the Way We Create Change

The Heart of Business, I've Got a New Hero

by Bill Stevenson

His name is Dan Pallotta . I heard him do a short commentary last night on Marketplace, and I was really surprised at his veracity and passion, which you frankly don’t often hear on public radio. What’s more, his premise makes a lot of sense. He says that we hamper the ability of charities to produce social benefit because we impose on them what he calls a “puritan ethic of deprivation.”

We need a third category of businesses, beyond the “for profit” and “not for profit” designations. Some have suggested a new category called “for benefit businesses” that would allow charities to make money and have access to capital like the nonprofit sector does. Bill Drayton of Ashoka argues that this is inevitable, that charities and social entrepreneurs MUST begin acting more like businesses. In short, tax law and donor expectations need to catch up with the emerging reality that social causes are best served when charities are allowed to use the tools of capitalism to succeed.

Dan Pallotta’s new book could be the start of something great. And remember, you heard it here first.

This time of year our mailboxes are full of terrific organizations asking for that one-last-of-the-year gift to help them get through the always tough development months of January and February. So many to chose from and so many deserving and in this year so little money available for them. What a perfect time for read Dan Pallotta's new book -"Uncharitable".

Dan strips away the traditional ways of fundraising and dares to suggest new models that will be bettersuited for the 21st century. Former Senator Gary Hart of Colorado says about Dan's new tome, "This is nothing less than a revolutionary work."

Dan is a longtime friend of mine and I have had the honor of watching his skills and talents develop over the years. He has always chosen to seek an unique path and one that often treads very close to 'the edge'. In that position, he has been able to see the world in a little different light than most of us. For him, that has sometimes been a difficult journey but for us, he has created new models in fundraising that are now acceptably practiced by many organizations.

Quite simply, "Uncharitable" is a compelling read for anyone ingrained in development, involved in charities or determined to find new ways to raise funds in a traditional world. In this thought-provoking book, Palotta examines the misconceptions, gives us case studies and outlines a new path for NGO's. When I first opened the book, quite honestly, I was a little concerned that I might find it too dry or scholarly for holiday reading. However, once I started it, I couldn't put it down. Even the charts at the end had me hooked!

Like all amazing pioneers, Dan hasn't been without his distracters, but they would be doing themselves a disservice not to open their minds and read this revolutionary book. You may find, as I did, areas of disagreement, places where you have questions and sometimes sections where you might want more details. Yet, isn't that what a good book is supposed to do - make the reader question and think?

Dr. David Ho, who is Director of Aaron Diamond AIDS Research Center and in 1997 was TIME magazines "Man of the Year," knows a great deal of the importance of money in doing good work. He says of "Uncharitable":

"Dan Pallotta has elevated the questions we need to be asking. His book provocatively challenges traditional views of how charities should operate and provides a thought-provoking alternative."

I agree. You should do yourself a favor and pick up "Uncharitable" today.

"Dan Pallotta sent me a copy of his new book Uncharitable to review and I LOVED IT! I am a big believer in the potential of the nonprofit sector and I also believe that there are many structural issues that impact how effective nonprofits can be at achieving their missions. Dan's premise is that human beings are innately charitable and that we have a desire to help our fellow man. Our current system of charity is the bureaucracy that we set up to fulfill that need to help one another. This system has remained unexamined because doing "good" is good enough. In this book Dan asks some key questions: Does this system work? Is it the best system we could have? What other systems are available? His vision is to set free charities and all of the people that work for them from a set of rules that were designed for another age and another purpose and begin to use the rules of free-market capitalism to supercharge the sector. Before you get all high and mighty and remind me that the free-market system is collapsing around us everyday and that opening up the nonprofit system to its corruption and volatility wold ruin the purity of the sector, I'd like to remind you that the sector is already influenced by the corruption of the for profit sector, as evidenced by many high profile scandals and the volatility for the free-market is what is shrinking my foundation's endowment. The nonprofit system has all of the pitfalls of a free-market system with none of the benefits (e.g tolerance for risk, investment in research and development, and competitive pay). This book is destined to start some great conversations, which are very overdue.

Thank you so much for the review and for reading the book. A few corrections and comments:

Dozens of committed volunteers provided massages for free, at zero cost to the charities (these were grueling events involving up to 100 miles of cycling or 26 miles of walking a day, often creating extreme muscle stiffness.) Some of the more humorous volunteer-run water stops provided cucumber eye masks on the road, also at zero cost to the charities. As for the advertising, it was primarily on radio stations and in major metro papers, like the Boston Globe (which earned a profit off of the advertising) – it always began with compelling statistics about AIDS and breast cancer. It is a powerful example of the double-standards we have between the for-profit and nonprofit sectors that we call it “building demand” in business but “glitzy” in charity. It is further evidence that in charity we see money spent on advertising as money taken away from charity, when in fact, without the advertising, there would have been no money going to charity. The advertising is what drove people to the events. We don’t deny furniture stores or department stores the ability to use full-page ads in the Globe to drive customers to their stores, why would we deny it to charity? It only keeps our causes muted, and, therefore, small.

“Our Puritan ancestors insisted that giving be motivated by love of humanity, not the desire for gain; profit and its attendant risk-taking, they felt, polluted charitable acts.”

Actually, the New England Puritans were capitalists and were accused of extreme profit-making tendencies. Charity was a way of doing penance for that. Puritan giving was motivated primarily by anxiety about eternal damnation, reciprocity (if I help you now you will help me later if I am in need) and the desire for community standing. They were often more concerned about how their own benevolence rated them in the eyes of God than they were about the objects of their benevolence. Most important, they viewed the divide between rich and poor as ordained by God – inevitable – and something that would always be with us. Not a great worldview if we want to eradicate poverty.

“…pay investors in fund-raising events a return from the net take.”

Close, but what I am actually advocating is a stock market for charity, whereby people and institutions at all socio-economic levels (including retirees with 401ks, union pension funds, and even college endowments) could invest desperately needed growth capital in their favorite charities, helping the charity to grow and getting a financial return themselves. It’s not for the sake of the investor that I advocate this, but for the charities, who are currently deprived of the capital they need to scale up to the problems they confront.

“Pallotta's critics contended his company fell short on disclosure.”

The company was a model of disclosure. Participants could go onto our website, or could get an annual report right at our events that disclosed our company’s fee for each event, dollars raised, dollars spent on marketing, dollars spent on logistics, and dollars netted after all expenses. That data is still available at http://www.pallottateamworks.com in the “Full Financial Disclosure” section. We were not required by law to post any of this on our website – we did it because we cared about disclosure. One would be hard-pressed to find other event companies (or charity events) that provide this level of disclosure, if any.

“…a 1996 AIDS ride promised participants that 60 percent of the take would go to charities, when they actually got only 19 percent.”

One hundred percent of all funds raised went to the charities, into lock box accounts under their exclusive control. They then reimbursed us for expenses on a dollar-for-dollar basis with zero mark-up. We were paid a fixed-dollar production fee for each event – never a percentage. A hindsight calculation puts that fee at about 4.01% of the total dollars we raised. We never promised percentage returns. Post 1996, all of our pledge forms indicated that we never guaranteed percentage returns, and that those returns depended entirely on the number of participants that registered and the dollars they raised.

Again, thank you for the thoughtful review.

Kind regards,

Dan Pallotta

Author, Uncharitable
Founder, Pallotta TeamWorks

Dec 11, 2008Chronicle of Philanthropy

Note: The following letter to the editor was sent to the Chronicle of Philanthropy on December 9th to correct serious factual errors, and comment on the implications of the piece:

To the Editor,

Your story entitled, "A Maverick's Defense," about my new book contained factual errors. I did not sue Avon's Foundation. TeamWorks did. TeamWorks did not sue Avon for "canceling its contract." It sued for unauthorized use of a protected idea. Avon did not settle with me for $7.5 million; it settled with TeamWorks for $7.5 million, which covered some - but not nearly all of the company's obligations. Further, my salary did not lead to the company's closure. Avon's breach of contract led to the loss of a contract with another charity, which led to the company's closing.The article also quotes an Avon representative stating that, "...PTW had priorities other than fundraising for the cause, which was (and remains) the mission of the Avon Foundation." Sadly, the article did not mention that, according to Avon's own financials, Avon's fundraising for breast cancer from the events dropped from approximately $140 million in 2002 when we were producing them to $29 million in 2003 when Avon produced them on their own.

Separately, the article's conflation of my $394,500 salary in 2001 (we netted $69 million for charity that year) with the notion of "get[ting] rich," is more evidence of our suffocating double-standards between the for-profit and non-profit sectors. Forbes reported that Avon's CEO, Andrea Jung, earned $11.1 million in total compensation in 2007. Avon's shareholders are neither stupid or gratuitously benevolent. Presumably they pay her that amount because she produces commensurate value. Doesn't the eradication of breast cancer deserve the same talent as the sale of cosmetics - even if we have to pay someone $11.1 million annually? And isn't its eradication what we should be striving after? Surely, women with breast cancer deserve a say in the matter, and it doesn't take a sooth-sayer to predict what their answer would be.Sincerely,

It suffers, says the former fund raiser, from a self-defeating mind-set that demands charity workers sacrifice personal benefit to help their social causes.

Those problems — and the ways to overcome them — form the basis of Mr. Pallotta's book Uncharitable: How Restraints on Nonprofits Undermine Their Potential, which was released this month by Tufts University Press. In it, he writes that the "nonprofit sector is being suffocated by a morality imposed from the outside and reinforced from within," and that he intends to lead an "uprising" to free it.

While many nonprofit officials may applaud Mr. Pallotta's strongly worded, if verbose, book, especially regarding the issue of compensation of charity employees, some say his controversial background makes him a dubious reformer.

As the founder of the now-defunct Pallotta TeamWorks, a California company that planned three-day charity bike rides and other big events, Mr. Pallotta says he brought in $305-million for AIDS and breast-cancer research during an eight-year period.

But his six-figure salary — $394,500 in 2001 — and questions about other issues led to its closure, an ugly lawsuit against a corporate foundation, and distrust among some observers.

"He strip-mined the cause," says Robert Egger, founder and president of the D.C. Central Kitchen, a Washington antihunger group. "He did a tremendous disservice."

Mr. Pallotta defends his tactics and says the criticism he received is a reflection of the "dysfunctional ideas" that underlie the nonprofit world — ideas, he argues, that prevent the elimination of hunger or cures for deadly diseases.

"We would do things that would work very well that would raise huge amounts of money and we would get criticized for them because they violated some ethic," he tells The Chronicle in an interview. "At some point, you have to question whether the ethic is getting in the way of real progress."

'Nonprofit Idealogy'

Mr. Pallotta, who lives in Los Angeles and works as a marketing consultant, is quick to say that nonprofit workers and donors are not the problem.

Instead it is a "nonprofit ideology," which he says originated with the Puritans of New England in the 1700s, that exults the idea that one must be selfless to do good works.

The best example of this — and the primary target of Mr. Pallotta's book — is the expectation that nonprofit executives should forgo being well paid.

Why can't self-interest motivate humanitarian work as it does business? he asks.

"We allow people to make huge amounts of money doing any number of things that will hurt the poor, but want to crucify anyone who tries to make money doing something that will help them," he says.

As a sign of this, he points to a recent proposal by San Francisco's Board of Supervisers that would have limited the pay of charity directors whose groups receive city grants.

While that measure was rejected, the thinking behind it and similar efforts stifle nonprofit pay, which hurts charities' ability to attract the brightest employees, he says.

"That has the effect of sending all of the top talent from the nation's best business schools directly into the for-profit sector, because there's no way they can make the economic sacrifice that that ethic requires of them," he says.

The ideology also preaches other "commandments" that hamstring charities:

Don't take risks with fund raising. If a new way to raise money fails, the charity will be accused of being wasteful or mismanaged. But he says failures can point the way to potentially profitable new practices.

Don't spend money on marketing. Buying an expensive commercial during the Super Bowl would be criticized because it has no direct link to assisting needy people, he says, but it would greatly increase the public's knowledge of a cause.

Don't save money. He writes that donors unwisely expect their contributions to be spent immediately, which leads to short-term planning by charities.

"I have observed a lot of irrationality that's imposed upon the sector by society's ethics about charity," he says. "I've seen how debilitating they are and how they suck the enthusiasm and life and energy out of people who come into the sector full of dreams and passion."
Fund-Raising Company

In a sense, Mr. Pallotta is talking about himself.

He started Pallotta TeamWorks in 1994 full of ambition. The company pioneered large-scale rides or walks to benefit AIDS and breast-cancer groups. It challenged participants physically and financially, asking them to raise between $1,200 and $10,000.

But the overhead costs triggered concerns. As riders enjoyed hot showers and cooked meals, the news media and others asked questions about how much was actually going to charity; Bill O'Reilly began ranting about the company on Fox News.

Mr. Pallotta writes that administrative costs averaged 45 percent for his events. While the figure exceeds watchdog standards, he says it was justified because of the logistical complexity of the rides, the large amount of money he was bringing in overall, and the fact that aportion of the expenses included advertising, which made people aware of the charitable causes that benefited from the events.

Despite his defense, in 2002 charities started pulling out of his events, forcing Pallotta TeamWorks to lay off its 350 employees and shut its doors.

Pallotta TeamWorks sued one client, the Avon Foundation, for $21-million for breach of contract. In 2005, the company settled the case for $7.5-million, Mr, Pallotta says.

But in an e-mail message to The Chronicle, she writes, "With the self-described goal to 'get rich doing good,' PTW had priorities other than fund raising for the breast-cancer cause, which was (and remains) the mission of the Avon Foundation."

The lawsuit and other aspects of Mr. Pallotta's history lead some nonprofit experts to be skeptical of the ideas he proposes in his new book.

The D.C. Central Kitchen's Mr. Egger says he agrees that nonprofit salaries should be higher, but that Mr. Pallotta overstates the problem.

"I don't think a lot of people would defer working in a nonprofit if they don't receive a scale equivalent" to corporate pay, he says. In addition, the current economic recession and anger about Wall Street executives' "golden parachutes" makes Mr. Pallotta's argument moot, he says.

Art Taylor, president of the Better Business Bureau's Wise Giving Alliance, a charity watchdog in Arlington, Va., takes umbrage at Mr. Pallotta's broadside against his group's standards.

In the book, Mr. Pallotta rails against the alliance's suggestion that charities should spend at least 65 percent of their revenue on programs, saying it's unreasonable and easily gamed by hiding administrative costs as program expenses.

Mr. Taylor agrees that the standard should not be the only characteristic a donor considers, but says charities themselves support it and that Independent Sector, a Washington coalition of nonprofit groups, calls it "reasonable."

"I would say the vast majority of charities do not have a problem with it," he says.

A 'Powerful Argument'

Despite the criticisms, Mr. Pallotta's new book has fans.

Bill Shore, founder and executive director of Share Our Strength, an antihunger group in Washington, says the book will make nonprofit leaders speak up about the need for better compensation, the need to save money, and other issues.

"Dan's experience and career make this such a powerful argument," Mr. Shore says.

For his part, Mr. Pallotta says he hopes people will focus more on his message than on his past.

With the financial meltdown roiling markets and a new president coming into the White House, the nonprofit world has an opportunity to improve itself — and maybe the book will be a guide, he says.

"I hope that it liberates something in the soul of people who work in the sector, especially young people," he says. "That it causes them to rise up and say, I will not dedicate my life to working inside a set rules that work against me."

Booklist

"Pallotta TeamWorks was the for-profit brainchild behind several campaigns to raise funds for breast cancer and AIDS research and awareness, creating several nationwide, marathonlike events that raised millions. But its founder came under attack for violating the sacred premises of charitable organizations:
low profile, low budget, and little or no profit. Pallotta turns on its head the assumption that charity and capitalism should be forever divided. Don’t charitable causes deserve the same kind of competitive forces that work to get results in the for-profit sector? Wouldn’t social causes be better served if charitable
organizations were headed by the kind of bright, aggressive executives that work in the for-profit sector? Pallotta traces the history of nonprofit organizations to Puritan notions of charity and self-denial. He also offers a detailed case study of TeamWorks and other trends in the nonprofit sector that only tweak around the edges of a system that is sorely in need of change if it is to deliver on its mission to improve socialinequities or cure diseases. A passionate, thought-provoking look at the nonprofit sector."

— Vanessa Bush, Booklist

Upper Valley Image Magazine

"...a radical reconsideration of the rules that restrict the agencies trying to help the underserved. The notion that these agencies should be able to utilize the same techniques that make the free market thrive is compelling. The Upper Valley is home to many nonprofits that could benefit from tricks of the capitalist trade."